Breaking News: Loyalty Programs Don’t Lead to Loyalty. Duh!

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I have been arguing for years that loyalty programs have little or no effect on genuine customer loyalty and now there are solid data to support that view. Colloquy, the loyalty marketing publisher and consultancy, recently released the results of a survey of 2500 Canadians consumers who were asked to talk about loyalty programs.

Nearly 50% of the loyalty program members said that special treatment is important to them, yet only 7% said that they get special treatment from their loyalty programs. These numbers are reminiscent of statistics that show that a very large percentage of senior executives feel that they are developing relationships with their customers while single-digit percentages of those same customers believe that anything approaching a relationship exists. Why are executives so out of touch with their customers when it comes to emotional connections?

In Canada, extremely large percentages of consumers are members of some form of loyalty program. The Colloquy research indicated that 87% of those surveyed were active participants in at least one loyalty program. The Canadian numbers are likely driven by the wildly-popular Optimum card from Shoppers Drug Mart, HBC Rewards from the Hudson’s Bay Company, and Air Canada’s Aeroplan frequent-flyer program which now has partners across a wide range of industries.

Research results such as these indicate that consumers perceive a ton of value in loyalty programs and use them often to earn rewards. But, they have precious little to do with loyalty. The best Canadian case in point is Air Canada whose Aeroplan program is extremely popular; far more popular in fact than the airline itself, which seems to be on a single-minded mission to disappoint and frustrate as many customers as it can.

So, don’t confuse loyalty programs with loyalty. At the end of the day, these programs drive short-term behavior, not loyalty. Most customers are in it for the points and the rewards that come with them, not because they hold the company in especially high regard.

Do loyalty programs influence customer behavior? Of course they do. But, if you are looking to build long-term customer loyalty, the kind of loyalty that is grounded in an emotional connection, don’t go running off to start a loyalty program. That’s trailing-edge thinking. These programs have been around so long that they are no longer novel.

The special treatment that customers crave and that they don’t get from loyalty programs will have to come from a concerted effort on your part to treat customers well, to demonstrate your interest in them, and to create opportunities for meaningful interaction.

21 COMMENTS

  1. I’m not a loyalty program person. What loyalty programs tell me is that there is something wrong with the value proposition. Why does a company have to “buy” loyalty? Aren’t the benefits and activities promised by the value proposition enough to attract and keep customers? How much does it cost to provide and manage loyalty programs and could those funds be used to improve the value proposition that could be applied to all customers? (Haven’t studied the cost factors but I’m sure someone has.)

    The last question brings up the fact that loyalty programs are geared to frequent buyers (maybe even large revenue buyers, which may be undercut by the loyalty program itself) and not necessarily valuable buyers. Are the less than frequent buyers, those who can’t or don’t buy often, any less valuable than the heavy buyer if they always buy from the same vendor? What rewards do these buyers offer to their vendors, such as word of mouth PR and low overhead service costs? How are they rewarded for these activities? Will the loyalty program drive away such buyers, like the acquisition programs that offer great deals to new buyers but nothing to loyal buyers?

    “Rewards” should be built into the value proposition for all customers and potential customers to take advantage of. If the value proposition is strong – benefits and activities promised are kept – then loyalty becomes moot for all customers. Good propositions keep every customer loyal!

    What do you think? What am I missing?

    Jonathan Narducci

    CornerStone Cubed
    Building Customer Powered Value

  2. Jonathan

    I think you are absolutely right, although many firms seem to struggle with the notion of the value proposition. In theory, the value proposition should be sufficiently all-encompassing that many customers will see the value involved. But, loyalty programs actually form part of the value proposition for those companies that have established them. In that sense, they deliver some form of value. And, indeed they do work for many of the companies in that they deliver value for both the company and its customers. I do not deny that a well-designed loyalty program with good rewards can represent a differential advantage. My concern is that some people believe these programs lead to customer loyalty, which they do not.

    You are also right that loyalty programs as they are conventionally designed lead to a “tiering” of customers, such that the high-volume customers reap the greatest rewards — which they should, as that is the whole point. But, it also leads to low-volume customers, who may actually feel much greater loyalty, receiving few if any rewards. As you suggest, it is much like the incentives offered to win back customers who have gone over to the competition. It certainly tends to make loyal customers feel much less valued. We see this most vividly when loyalty program operators, possibly realizing the massive contingent liability represented by those millions of points sitting in customer accounts, begin to put in place revisions to their programs that cancel points in inactive accounts or that require more points to claim rewards. The outcry from the low-volume customers is loud and negative.

    But, then these are not loyalty programs at all; they are rewards programs. They reward the high-volume customer; plain and simple.

    Jim Barnes

  3. I place loyalty/rewards programs in the same waste basket as I do mail-in rebates. Who is paying for all that fluff? In the end the consumer does! Manufacturers depend on a high percentage of rebate coupons to be lost or never submitted or else they never bother to actually mail you the rebate. Bah! If they could actually afford the rebate or the reward then take it off the price to begin with. That would impress me! Same thing with new automobile rebates. Don’t waste my time and energy with qualifying and other hogwash, take it off the selling price and let’s do business. Sadly, consumers now expect a business to “buy” their business up front with rebates, prebates and loyalty programs. The consumer assumes these programs give them lower prices but in the end it makes our cost of doing business increase, therefore the selling price of the products must increase to offset the additional expenses. We work our collective rear-ends off to provide exceptional service and experience but there is a cost directly related to that. Customers are willing to pay higher prices for exceptional service if you can live up to your claims. However, in my opinion it is self-defeating to offer rewards and loyalty programs when the true value proposition is in the quality of the experience. That is lasting value to every customer large, and small.

    -Don

  4. Jim,

    Thank you for the thoughtful and accurate response. And I agree that there’s a difference between “Rewards” and “Added Value Loyalty Programs.”

    I agree that the loyalty programs are part of the value proposition and can add value. But it depends on what it adds and what it subtracts. I consider things like providing business advice to loyal customers as a part of the proposition that truly adds value. Or training programs that go beyond the basics so more can be gained from products and related services because loyal customers will be frequent users and industry advocates. Real value for the customer that provides real value in return to the vendor.

    But my real point of the response was trying to identify the reasons loyalty programs fail. And the failure of the value proposition to be compelling throughout the entire “life” of the customer’s relationship with the vendor is a major cause, because its either weak or one that isn’t “updated” to reflect the “current” needs of the targeted customer.

    Jonathan Narducci

    CornerStone Cubed
    Building Customer Powered Value

  5. Jim

    It is generally accepted that loyalty programmes do have a role to play as part of the customer management mix. But their role is different for different groups of customers. To summarise the current research on loyalty programmes; they are most useful for building repeat purchase and retention in the least loyal customers, and are a legitimate part of the value propositions for the most loyal ones. The value in a loyalty programme is not so much in the points given to customers in exchange for purchases, as much as in the data gathered during those purchases. This is the basis of the phenomenal success of the Tesco Clubcard loyalty programme in the UK.

    But loyalty programmes are costly to administer. The likely benefits of developing and operating a loyalty programme should be weighed up against the costs before deciding to proceed.

    It is popular to bash loyalty programmes at the moment. They have a role to play in modern customer management, but they do require careful management thought. Perhaps it is the thought part that is the real problem.

    Graham Hill

  6. Jonathan,

    The conundrum that surrounds the value proposition has always been the definition of value. As your comments and those of Don Hill illustrate, value very much resides in the eye of the beholder. While some people see little or no value in loyalty programs and perceive that they add cost to the customer, others see great value and pursue the accumulation of points and the claiming of rewards with great gusto.

    They have been with us for 25 years or more, and are actually nothing more than electronic trading stamps. My mother collected S&H Green Stamps in a little book that she took to the grocery store every time she visited so that her stamps could be pasted in. Today, large retailers, hotel chains and airlines keep our points (stamps) for us in their databases. But, the principle is the same. So, the concept is not at all new – they are rewarding repeat behavior. And, as my colleague Graham Hill indicates in his recent post to this blog, they actually work and are an important component in the value proposition of certain firms.

    Of course, there are firms that have chosen to occupy a strategic position in the minds of their target customers by deliberately NOT launching a loyalty program. Four Seasons Hotels & Resorts comes to mind.

    What loyalty programs are not doing, as I think you and I agree, is building loyalty. When you speak of loyalty programs failing, I presume you are referring to the fact that they fail to lead to genuine customer loyalty. In fact, what the operator of the loyalty program typically fails to do is to capitalize on the frequency of contact and repeat buying behavior of the customer to build a closer relationship. That’s the failure. Without that, the loyalty programs of today will not become more than the accumulation of points leading to “gifts” and rewards.

    Maybe that’s the opportunity that this discussion leads to; the need to develop a strategy on the part of the operators of loyalty programs to convert a certain percentage of customers into true loyalists.

    Jim Barnes

  7. Jim

    The days when loyalty programmes were just ‘electronic trading stamps’ are long gone. Today’s loyalty programmes are more often a powerful mixture of customer purchasing information (e.g. Tesco’s Clubcard), communities of interest (e,g, Ducati’s rider community) and multi-sided markets (e.g. American Airlines’ 12,000 partners to earn and burn points). I am sure you agree that this is much more than just electronic trading stamps.

    Modern loyalty programmes have as big a role in building true loyalty (by which I mean an emotional committment to a company, its people or its brands) as many of the other strategies put forward such as EDLP, product innovation or customer-oriented experiences.

    The key is in recognising that the vast majority of your customers will not become emotionally committed to your company, its people or its brands no matter what you do. They will be retained as customers if you are lucky. In these circumstances, a modern loyalty programme is a powerful tool to drive customer business.

    Graham Hill

  8. Hi Graham

    Of course, I agree with you that loyalty programs have evolved over time. My reference to “electronic trading stamps” was made for emphasis and to reflect primarily the perspective of the customer. At the end of the day, from the customer’s point of view, the concept has not evolved very much at all, from the origins of the “baker’s dozen” to Green Stamps to Tesco’s Clubcard program: the more I buy, the more I get in return! Plain and simple.

    What has evolved, to your point, is how companies make use of their loyalty programs to track behavior, to target specific customers, and to accumulate data for their own strategic use and for the use of their partners. Therein lies to potential for these programs to be used to build what you call true loyalty. It’s unfortunate that more firms don’t seem to appreciate that potential.

    Cheers

    Jim

  9. Jim and Graham,

    I think you are both correct on certain points. The loyalty programs greatest benefit does lie within the data gathered if used intelligently, and it also is ripe with opportunity to monitor and selectively sell specific products to the end-user. Hewlett Packard (HP) is doing something similar with the independent business products dealer channel. HP realizes that most independents greatly influence their customers purchases of branded versus remanufactured toners. Therefore they (HP) have created a loyalty program that these smaller dealers can participate in. While this program isn’t on the scale used by the United Airlines of the world it does help create a brand loyalty toward HP and to the participating dealer. The 4% rebate is administered by HP however the dealers share responsibility to move HP products.

    Some loyalty programs may have merit but in my opinion there are better and more cost effective ways to create lasting loyalty. Our success lies in our people and I believe that in a customer centric universe the power is in the personal relationships we build.

    My compliments to you both for your excellent insights.

    Don

  10. This discussion is interesting – a lively discussion consisting largely of unsubstantiated opinions – which is great, because it shows (a) people care about rewards programs one way or another and (b) it points to the need for factual research in this arena.

    As it happens we have done some empirical research on the effects of various styles of rewards programs spanning over a dozen countries in the cards business. Our findings substantiate Jim’s point that rewards do not equal loyalty in any measureable amount. And this should be no surprise, since very few have emotional content to work with.

    The facts we reviewed indicate (for cards anyway) that they programs do not increase relationsip longevity, purchase volume or behaviour to any significant measureable extent. They are a price discount in essence most of the time, which fits how they got going with cards in the first place – a discounjt tied to purchase volume paid for by interchange fees which also vary with purchase volume. These programs used to be totally self funding (some are, some no longer are).

    Some programs have created powerful emotional connections, however, so it is unwise to dispose of the baby with the suds. Notable among these are the airline rewards which offer status, perks and even aspirational dreams on their participants. These attributes are not just bribes. They are powerful. They create loyalty to the program itself rather than the supplier of the redemption value. Aeroplan is a great example of a rewards program that is worth more than the airline as cited above (yes it is true).

    The other thing I wanted to comment on in this topic is the marketing information value. All the airline programs have terrific mailing lists. Also the choices people make on both the earn and burn side are priceless behavioural datasets. Whether the rewards program folks figure out they are in the data business or not is where the interesting part of the game lies.

    Just for clarity, when looking at numbers from Canada be sure to take into account the Air Miles program as well, which is a pure discount play across multiple providers. This is probably the largest program in the country so be sure to take it into account when looking at Canadian stats.

    David McNab
    Retention & Sales metrics
    Customer profitability

  11. David

    An interesting reponse. Like yourself, I based my response on the facts available. Namely, a large number of academic studies into loyalty programmes of various sorts, that suggest as I did, that they are most useful for building repeat purchase and retention in the least loyal customers, and are a legitimate part of the value propositions for the most loyal ones.

    Perhaps you could make available to the readers of CustomerThink the results of your study to further substantiate your own comment.

    Graham Hill

  12. Hi all,
    when I try to design a new CRM strategy or program (including loyalty), I first play my target’s role (Bob De Niro, thanks for living..).
    I enter that shop, buy things in that supermarket, travel with that airline, ask for that car’s price and features, and I look, ear, and feel.

    About loyalty, consider that in a typical worker’s day it’s easy to stop at THAT supermarket because it’s on the way home, or to buy clothes there because i like THAT style or THAT fashion maker. Unloyal customers usually only search for cheaper things or generic savings, they don’t give value to what they buy (sometimes they simply must save money, I don’t forget this…)
    But if you want to give loyalty a shape, its first step is quite cheap..it’s free !! And its name is: smile!

    Kind people in the shop, a guy who helps you loading your shoppers into your car or gives a candy to your children while you are choosing the dress for the wedding, is the first step to call you back there for your next purchase.

    Isn’t it? Loyalty programs, cards, points are the next step, and mean nothing without the first one. Everybody now offers such programs, so they do not differentiate one from another anymore.

    What about loyalty costs finally paid by customers? Yes, every program has a cost, but I (customer) would like to pay some cents a week to get a better service, kind people, good advice, targeted offers, and so on.

    Aren’t Ferrari buyers likely to spend lots of money for their car? Yes, but they drive a Ferrari..

    Thanks and my best regards to all,
    Max

  13. Hi Max

    I like the idea of adopting the persona of your customer and walking in his shoes. I use a “wear your customer hat” metaphor to illustrate the same thinking.

    I agree that we would all like to develop true loyalty by treating customers really well and generally trying to establish some element of an emotional connection with them. But, we also have to be realistic. Not all customers want a relationship, and many are and will continue to be price shoppers who want little but the functional components of the value proposition — reasonable quality, reasonable service, and reasonable prices. So, you can hire really nice employees and give candy to kids all you want, and you won’t make much of an impression on certain customers.

    And, that’s OK. But, it’s also why companies engage in promotional programs such as the loyalty programs that we have been discussing. My research on customer loyalty clearly indictes that customers understand the distinction in spades. They refer to such programs as “giveaways” and “gimmicks”; hardly the stuff of which lasting loyalty is made.

    One conclusion is that we may need the organized loyalty program to drive short-term customer behavior as well as the “softer” approach to customer interaction and experience to which you refer that will contribute to building loyalty. But, we need to understand that the one will not necessarily lead to the other.

    Thanks for your thoughts.

    Jim Barnes

  14. Hi Jim and all,
    thanks for quoting me.
    I just would like to add something to our discussion.
    I read very carefully your “Breaking News”, and I think the key is within these two lines:
    “Nearly 50% of the loyalty program members said that special treatment is important to them, yet only 7% said that they get special treatment from their loyalty programs.”
    So it’s true: many customers (I think almost all customers) like to receive special treatments, very few of them truly receive such treatments.

    I am writing to you from Italy, and maybe there are some differences between Europe and USA about CRM policies, but I don’t think they are so relevant.
    First of all, we all are human beings, and getting kindness from other people is always a good thing. Especially if you are spending your money with them ;->
    Here (but I think it’s the same on the ocean’s other side) many companies think a loyalty card in your pocket is the key of success.
    But my pocket now has plenty of loyalty cards: sometimes I even can’t find the right one, when I am near the cash register, with people in a queue waiting for me!!
    Finally I give up and pay, humming about stupid loyalty cards.

    And what about rewards? Sometimes you can choose among things you don’t like or need (kitchen tools, bed sheets, rollerblades, etc.) and you often also have to pay something (real money!) to get it.
    Why not offer you things you really want (you can know this analyzing your loyalty card’s report), and which are right there, perhaps two shelves ahead? Companies could also save mailing and packaging services, and if I like orange juice and swedish butter, I get orange juice and swedish butter, instead of some.. camping furniture.
    But I agree with you: not every customer wants a relationship. So let’s ask CRM gurus what we should do with them: I have some ideas as well (again, start from smiling, maybe later he would ask for your loyalty programs).

    For those who want to subscribe to them, I developed my personal policy: enter the customer’s house on tip toe, enter his kitchen only if he invites you there, but NEVER enter his bedroom, even if he invites you there.

    My best regards,
    Max

  15. Jim, I would very much have liked to share our research but it was a paid study that remains confidential to the sponsor. The broad conclusions I referenced were sufficiently generic enough to share here but the details must remain private, I am afraid.

    Sorry !

    David McNab
    Retention & Sales metrics
    Customer profitability

  16. I heard a radio ad for a Shell Oil credit card today, and I had to laugh. I used to have a Shell card that I got because the nearest service station to me is Shell, and the card offered a 5 percent kickback on Shell gas purchases. Then Shell sold the card to Chase, which offered me a similar discount on all gas and grocery purchases. When I heard the ad, I thought, “I’ve got a Shell card.” Then I realized that I don’t. So much for loyalty.

    I once had a Triple-A Visa credit card, which I got because the marketing said it would save you room in your wallet. The credit card, which had my Triple-A roadside assistance membership number on it, would work as both a credit card and my membership card for roadside assistance. But the three times I needed a tow and the handful of times I went into Triple-A for maps and tour books, I was asked for my membership card. No one would accept the credit card. I called Visa and was told it should be accepted. I called Triple A, and no one knew what I was talking about. I had to bounce myself up the tiers to a supervisor before I found anyone who even knew there was a Triple-A credit card. I canceled the card.

    I’ve had so many loyalty programs get dropped or reconfigured that it makes me wonder, as a consumer, how loyal the company is to me. Nowadays, I agree to participate in a loyalty program as long as it takes less than a minute to be enrolled in it; it costs me nothing; and I would ordinarily do a lot of purchasing at the store, anyway. In other words, I’m game to garner the rewards, but I don’t hold my breath that I’ll get any.

    Gwynne Young, Managing Editor, CustomerThink

  17. Hi Gwynne

    Thanks for the great examples of unrequited loyalty. They point out the fact that it’s not really about loyalty, but rather about rewards, and those rewards are intended to stimulate repeat buying, which they do, and which has little to do with an emotional loyalty. I have maintained for some time that the companies that do indeed cultivate genuine loyalty on the part of their customers won’t have anything to do with and certainly don’t need “loyalty” programs. They just do it naturally and they earn our loyalty along the way.

    As for the question of who is loyal to whom, I do believe that there are certainly many companies who feel and demonstrate a certain loyalty to their regular customers whom they have gotten to know over the years. I am sure we all know of smaller companies in particular who “go out of their way” for us, or who in other ways seem to really care about how satisfied and happy we are. The challenge is to transpose that way of viewing the customer into a large organization that is driven by quite different motivators and whose performance is judged almost solely on short-term financial measures.

    Cheers

    Jim Barnes

  18. In our study of Customer Experience Management last year, we asked customers to write about companies that delivered a “consistently excellent customer experience.” Based on an analysis of write-in responses we indentified five key attributes:

    1. Well-trained and Helpful Employees
    2. Excellent Customer Service
    3. High-Quality Goods and Services
    4. Friendly and Caring Employees
    5. Personal Attention, Reward for Loyalty

    Number 5 was combination of personal recognition for continued loyalty to the company (essentially, repeat buying), along with tangible rewards including points and discounts. Marriott Rewards was cited by several as doing a good job here.

    While I agree that “points” or other rewards programs don’t, all by themselves, create genuine loyalty (the emotional connection), I think they are part of the mix that businesses have to consider using to appeal to modern consumers. For example, I do business with Wells Fargo for many reasons, including their rewards program and the service and personal attention I get from their staff.

    Bob Thompson, CustomerThink Corp.
    Blog: Unconventional Wisdom

  19. Bob

    Very valuable input to the debate. Of course rewards matter; more to some customers than to others. Are rewards programs an important part of the value proposition for many companies, most notably airlines and hotel chains? — of course they are. But, what is important to me in the information you cite from the CustomerThink CEM study is that personal attention and reward for loyalty is ranked fifth. These results corroborate what I see in my research with customers in a variety of industries; it is people that are most important in making the experience a positive one.

    Also, implicit in your post is the notion that rewards don’t have to be tangible or “points” based. Recognition is an important form of reward and costs little or nothing. One of customers’ most heartfelt complaints is that they are not recognized for having given a company 10 or 20 or 30 years of business.

    The point is that rewards programs (a.k.a. “loyalty programs”) do indeed have their place: as I said from the start, they do work in driving repeat buying behavior. But, they may be more pertinent and successful as rewards for behavioral loyalty rather than as creators of emotional loyalty.

    Jim Barnes

  20. Simply put:
    – Loyalty programs reward buying frequency.
    – Yet, that buying frequency would exist without the loyalty programs.
    – Loyalty programs (in the classic sense) don’t build loyalty but they do create a ‘reward expectation’ for a behavior that already exists.

    Concerning customers
    – Customer like loyalty programs.
    – Customers like receiving extras, certainly when those extras actually have some value (not just financial!)and relevance (an important one, relevance)
    – These extras only influence in cases of “all things equal”
    – In case of “all things equal” the brand should invest in differentiation, not in false loyalty.

    Meaning: loyalty programs reward existing loyalty, so they don’t build or lead to it.

    Geert Stox

  21. I know this is an old thread, but the topic is interesting.

    Geert,
    your comment is very succinct and goes to the heart of the matter. I also agree with you substantially, except i would qualify to say “the majority of existing loyalty programs as currently conceived” then list the things you itemize. Plus i would not go so far as to say “…loyalty programs [even as conceived] do not build or lead to [loyalty]”. The primary purpose of the so called ‘loyalty’ and ‘rewards’ programs is “client retention”. Because most programs use continuous schedule re-inforcement, many clients would stop doing business with a company if the ‘loyalty’ program is suddenly cancelled – in other words the program is part of what is “keeping” them there. The reason these people would leave is not because loyalty as a behavior modification concept is moot, but rather because of program design not adequately rooted in established behavioral science.

    A post prior to yours indicated ‘loyalty’ programs “modify behavior” but do not create emotional loyalty. Behavior modification is what is supposed to occur (not emotional modification), as a well designed program uses well established principles of classical conditioning (viz pavlov).

    Here’s is my 2-cents (which i do not purport is the final word, but it is what i believe at this moment):
    –use of the word loyalty is a misnomer; they should be called “behaviour modification” programs
    –a behaviour modification program whose design is rooted in classical conditioning techniques for “long-term” behaviour modification can and will cause long-term behaviour modification [problem: we’d be creating addicts and eventually regulations will step in to stop it – i’d hope]
    –another large reason ‘loyalty’ programs become less effective overtime is “copycating” by competitors; hence eliminating your initial advantage [design a program hard to copy and you’ll see longer term client retention]
    –if by loyalty you mean ‘having genuine affection’ for the brand/company, then this will not come through behaviour manipulation. This will only come the old fashion way, which is via sincerity and having a truly superior value proposition [now combine that with a good long-term behaviour modification program and you’ve hit the Holy Grail!]

    W. McLennon
    Director Business Development
    Mocelle Edan (Canada) Inc.

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